Is the Weakened Kenya Shilling Hurting the Real Estate Market?

The weakening of the Kenyan shilling and rising inflation has contributed to the slowing down of the real estate market. This year, the currency depreciated by 28 per cent and inflation went up to 16.67 per cent resulting to real estate developers having to reach deeper into their pockets. “The current exchange rates are quite worrying. We are beginning to see developers slow down on their projects.” Housing Finance managing director Mr. Frank Ireri told journalists.

Construction costs have risen by up to 40 per cent further slowing real estate development. For instance, the Kenya National Bureau of Statistics (KNBS) sited cement consumption, an indicator of real estate development, went down by 6.5 per cent to 256,326 metric tonnes in June from 274,073 tonnes a year ago.

Manufacturers have also felt the brunt of the currency’s depreciation. Mr. Raval Narendra, CEO of Devki Steel Mills, one of Kenya’s largest producers of construction materials noted a decrease in sales by 20 per cent in September and anticipates if to dip further to about 30 per cent.

Consequently, the Nairobi City Council (NCC) saw a decrease in the number of approved building plans in the last 8 months, by 9.7 per cent to 2174 from 2407. Mr. David Gatimu, an assistant director of Developmental Control at the department of City Planning, pointed out that the inflation was the main reason developers were postponing their projects due to the consequent increase in cost of doing business.

First time home buyers might have also been forced to shelve their dreams of owning homes as it is now more difficult to raise the initial capital for a home purchase. The high cost of construction materials has also dealt a huge blow to self-build housing. High cost of commodities has also made it difficult for mortgage home owners since most of their savings goes to household budgets.

The cost of borrowing in Kenya has also gone up as financial companies adjust their base lending rates to reflect the weakening shilling. The rising lending rates will have a negative effect on the real estate sector by making mortgages unattractive for both existing and potential clients, especially among the middle income earners.

The higher lending rates coupled with high cost of building materials means that even potential developers will have to wait longer before embarking on any project, hurting the sector further. With returns from real estate investment in Kenya being expected to slow down this year due to the high cost of construction materials, real estate investors as well may be forced to stay away.

One thing is for sure though; the downward turn in the real estate sector is due to the increase in inflation, forcing producers of consumer goods to increase prices, ultimately increasing the cost of construction.